Subscription Models and More with Holger Blankenstein of Volaris

Mexican low-cost carrier Volaris has been one of the world’s most innovative airlines when it comes to experimenting with new approaches, adopting technologies and harnessing data. Recently they incorporated a new revenue model by launching a subscription service called v.pass. We caught up with Holger Blankenstein, Executive Vice President to learn all about it.

Read the interview below to get his insights on airline subscription services, innovation in the airspace and his take on the long-haul low cost business model.

I thought we could kick things off by you giving a brief description of Volaris’ v.pass and discussing how it works.

Sure. Let me give you some context about what we’ve been thinking in the past year. You know there's quite a few subscription models across different verticals and sectors and industries out there; you have Spotify and Netflix and so on. And so we thought, “Why not?” You know, why not go out and see whether that's a model that works for the airline business and for customers?

Basically the way it works is there's a dedicated landing page which is vpass.volaris.com and you will come there and you select what kind of product you want to have. In the future, you can build your own subscription. That way you get to tailor it to your needs, whether it’s international flights or domestic flights from a certain hub. As another example: whether you usually fly with luggage or without luggage.

The idea is really to let the customers decide how the subscription looks like. For now, what we have done for the initial phase to get the product out is offer domestic flights both one way and round trip. And then you select a few options and there's also an option to add other products like luggage. With that you pay a monthly amount and that monthly amount entitles you to one flight a month. The only thing you have to pay on top of that is taxes.

So you’ve already built this product with considerations to ancillary revenue?

Yeah absolutely! I mean if you look at the pricing for the subscription, it's pretty aggressive. If I recall correctly, it's something like 600 pesos. That's not even 30 euros for a base fare. So what we're trying to do is – as with our entire business model – recoup revenue with ancillary products. They are pretty limited right now; I think just luggage check and/or cabin.

What were the internal discussions like when you originally came up with this idea? Actually, how did you come up with the idea to begin with?

Who or how exactly we came up with that is a good question. We constantly have discussions. All the way from the CEO down to the ancillary teams, the tech team, the marketing team. We obviously all read quite a bit and subscriptions have been pretty well covered. We have seen Surf Air with their subscription model tailored more to charter flights and we thought, “Why not try it?”

We did not go through our standard development process. We said, let’s find a small company who’s able to do something quickly for us, but has the knowledge of an underlying reservation system of an airline and our business to really get this thing out as quickly as possible.

And that company you're referencing is Caravelo, right? How does the partnership work with Caravelo and how involved have they been in this process?

The partnership is great. We’re working with them on a couple of projects, so one of the benefits we have with these guys is that they’re already connected to our reservation system and everything is already set up. There isn’t this deep initial learning curve where you first need to understand how the other’s basic infrastructure works. They already went through that. So in that sense we were able to tackle this problem pretty quickly. They are a rather small company so they are really lean and agile in how they work. And we already had an established relationship with them, so that helped a lot.

Who would be a typical customer for v.pass?

V.pass is not necessarily something for 100% of our customer base. There are different use cases. One can be a business person, but not the typical corporate business person who books through American Express or some in-house travel agent. Rather the cost conscious small to medium size enterprises that have regular travels. Also here in Mexico we have lots of nice beach spots, so one use case could be a weekend at the beach once a month or so. Some people have weekend houses. Overall, I think the first group I mentioned is a more suitable segment for this product.

It’s all part of the process. We worked with a company to understand where the consumer needs could be, which was basically small businesses and leisure. The idea here was to get this thing out quickly like we did, and then from there gather the data and understand who is actually using the product. Learn how to manage a subscription product, see what else we can improve about it and see what other segments we can link with the product.

Maybe it's a little too early in the product lifecycle, but has the data told you anything interesting?

The uptick initially was pretty slow and that was mainly because we we were still fixing a few bugs in the product. But then we started doing real promotions, so we really promoted this product. We gave price promotions; we advertised in social media and that generated quite a bit of demand. So yeah, we already have four digit customer numbers for such a small product. That's pretty solid I think.

How would you define success? What metric would you apply to find out whether or not this new venture has been successful?

That's part of the learning. What does a subscription business use as metrics? There’s quite a few. There are definitely those more simple metrics we look at that helps us understand how many customers can we convert to this product.

We plan to look at more typical subscription metrics like monthly recurring revenue, churn rates and then something like the average ticket size. Given that there's some flexibility in the product in terms of what you can add, we ask things like, do people purchase the one way or round trip ticket? Do they actually add those two ancillaries that we currently offer?

Once we get this rolling, we will probably also look at the lifetime value of those customers. One metric we’re definitely looking at currently is how much does it cost us to acquire those customers? While in the beginning we’re willing to invest some money and get this product to the market and incur some higher customer acquisition costs, in the long term we definitely want to drive that down.

Those would be the main metrics. For the first one, in terms of acquired members, we are right on track for what we set as our yearly target.

What is this like from a revenue management perspective?

There is a challenge in terms how you revenue manage the whole thing. Because you already sold a product to the customer, but you give the customer the flexibility in terms of what routes she/he flies or when she/he chooses to book. So there's a bit of a challenge on that end, but so far I think we are pretty well on track in terms of combining the traditional revenue management logic with this one.

Because of these challenges, have you placed certain stipulations on the product? Like for instance, can a user of this subscription service only book a flight so close to the day of departure?

There are some. Revenue management is part of this project, so they have been very open to testing things out. Right now we are rather flexible. Once we start understanding the travel patterns and the booking patterns, we’ll probably adjust a little and narrow it down a little more without restricting too much of the product. But right now we've opened it up for learning purposes and while it's still a small revenue stream we can afford that and look ahead.

Do you have any idea of what percentage of your business could from a subscription model?

That's a tough one. It would be like wild guessing at this point.

There's a balance between managing the technical complexity of this product and at the same time leaving enough flexibility to the consumer so that we find enough customers to make this attractive. And right now it’s a small test for a small group of customers. It depends really on how much we want to scale this and how successful the initial phase is.

If you could look into your crystal ball, do you think this airline subscription model would be something that really takes off within the industry? Looking maybe 5, 10 years down the road.

Absolutely. I think there is always going to be a customer segment that’s going to be interested in this. The subscription model can be tailored in so many ways that I'm sure there's a few scenarios where this is going to work out really nicely.

Maybe a frequent traveler in future doesn't really care anymore about points or anything, and just wants to have a good guaranteed price and availability with it. It doesn't need to be monthly; the product just has to be right. It could be for a few flights a year or it could be for only one experience a year; like a full vacation, or two vacations a year, or five weekends or so.

There's so many variations of this subscription model you could do that would have benefits for both the customer and the airline in terms of locking in revenue, locking the customer and getting the data on customer behavior and travel patterns and purchasing behavior. Definitely I think this will have potential and I think it's the classic example of running as many iterations as possible to make this thing work.

In general, it seems that Volaris is doing quite well. Recently you guys expanded both on routes and on aircraft. What's the future outlook? How far are you looking to grow?

I don't remember the exact number from the order, but more than a hundred aircraft are arriving in the coming years. There's some coming as replacements and most as expansions to our fleet.

There's a lot happening. A year and a half ago we opened a sister/cousin airline in Costa Rica under the Volaris brand. We just launched U.S. routes with that airline, which go direct from the U.S. to Central America.

We see that there is demand for this business. There's still lots of consumers traveling by bus in Mexico who are a very interesting market for us. We see in Central America there's still lots of routes that can be operated, that either are not operating or are just operating with very high fares by legacy operators.

We still see a lot of potential to grow in the region both to/from the U.S., within Mexico and in others. And now obviously in Central America.

And do you have any ambitions to maybe one day do long-haul flights?

There’s this whole discussion in terms of whether or not ultra low cost works with long haul. My opinion – but that's just my personal opinion – is that there is not yet an aircraft on the market that offers the economics for that. Those are basically the cost advantages that we have versus the legacy carriers, which plays out very well on short/medium haul or short haul flights. But once you move into long haul that cost advantage is diluted by the length of the trip.

For now, I think we're pretty comfortable where we are. You add a lot of complexity once you go into the long haul business.

Yeah, that's certainly understandable. So what do you think about the likes of WOW air and Norwegian Air?

If you look at WOW air, they really don't have a real long haul. What they have is a beautiful geographic location where they sit right in between the North American continent and the European continent. So they just combine two short/medium haul routes into long haul so they can operate that that kind of business model.

There's Norwegian and then there's other initiatives there such as Level and AirAsia X — not sure how well they do. But it's probably not pure low-cost; you cannot make someone sit in the seat without any comfort for 10 hours. So it's a different business. Norwegian is not a profitable business so let’s see how that plays out. There’s a lot of rumors of takeover.

I think there is not yet an ultra low-cost carrier who is making a sustainable profit, so that would kind of confirm my hypothesis.

These are very good insights. Thank you very much for this. And bringing it back to Volaris, It seems like you are a very innovative airline. What other areas are you looking to expand from an innovation standpoint?

So obviously [being a low cost carrier], everything related to the ancillary business is important for us, as well as everything related to growing the average ticket size of the customer. And we feel there is still some potential there. When you look at how much the traveler spends in total for a vacation, what Volaris gets from that is still small. I think there's a lot of potential in terms of offering the right product to the customer at the right moment and being able to recommend products to the right customers.

We’d like to deliver much more value in our marketing communications and our online experience and in the mobile experience in terms of personalizing and delivering accurate recommendations that are actually of value to that specific customer.

There's a lot of innovation we're doing in terms of servicing the customer. For instance, we ran a beta with Facebook. We were part of a globally selected group of five companies working with Facebook to implement Facebook Messenger as a website widget, and that worked out really nice. We basically got rid of our classic chat provider and now work directly with Facebook Messenger. That has a lot of advantages in terms of asynchronous communication with the customer across different devices.

We are working on a few other betas with Facebook, but we also work with companies like Volantio to automate certain services like re-accommodating customers in case of flight interruptions. In an automatic way, not the manual way with call centers.

Here, the main topic is really that through innovative approaches, what we are trying to do is provide a better service to the customer and be more efficient in our customer service and with that, be able to lower the cost of the whole operation even further.